Theories Of Distribution

Introduction

Of the theories of
distribution, the marginal productivity theory of distribution has been the most popular
one, having been modified by economists from time to time. But as we shall see below,
this theory touches the problem of factor pricing under perfect competition from demand
side alone and neglects the supply side.

This modern theory under perfect competition is called generally factor pricing. An
absolute thesis of factor pricing should analyse the complexities both from the demand
side and the supply side.

Nevertheless, there
are other realistic cases of factor pricing when there is (i) Perfect competition in
the factor market and imperfect competition in the product market (ii) monopsony in
the factor market and perfect competition and monopoly in the product market and (iii)
monopsony in the factor market and monopoly in the product market.

Concepts of Factor Productivity and Factor Cost

Concepts of Factor Productivity

Physical Productivity

There are two main concepts relating to factor productivity of any factor in terms
of goods and services, it is called physical productivity. It is further divide
into average and marginal physical productivity.

Average Physical Productivity – APP is the physical units produced per
unit of the variable factor. It is arrived at by dividing total physical productivity
TPP by number of units of the variable factor employed N, i.e.

APP
= TPP
N

Marginal Physical Productivity – MPP is the addition made to total output
by employing an additional unit of a variable factor.

MPP
= TPPn – TPPn-1

Value of Marginal Physical Productivity – VMPP is obtained by multiplying
MPP with the price AR of the product.

VMPP
or VMP = MPP x Price (AR)

(ii) Revenue Productivity

When we express the productivity of a factor in terms of money, it is called revenue
productivity. It is further divided into average and marginal revenue productivity.

Average Revenue Productivity ARP – ARP is the revenue obtained per unit
of the factor employed. It is obtained by dividing total revenue productivity
TRP by the total number of units of the factor employed N i.e.

ARP
= TRP
N

It is also obtained by multiplying APP with the price of the product.

ARP
= APP x Price (AR)

Marginal Revenue Productivity (MRP) – MRP is the addition made to total
revenue productivity by employing one more unit of a variable factor
i.e.

MRP
= TPPn – TPPn-1

Let us see an illustration which gives the picture of the entire aspects of Factor
Productivity.

Illustration 1

The below given tablet presents, Total units of factor Employed, Total Physical
Productivity and Price, based on which you have to ascertain the following:

Marginal Physical Productivity

Average Physical Productivity

Total Revenue Productivity

Marginal Revenue Productivity

Average Revenue Productivity

Value of Marginal Physical Productivity

NValue in Units

TPPValue in Units

P (Price) Value in $

1

10

7

2

30

7

3

43

7

4

55

7

5

74

7

6

80

7

7

80

7

Solution

Total,
Physical And Marginal Productivity

NUnits

TPPUnits

MPPUnits

APPUnits

PIn $

TRPIn $

MRPIn $

ARPIn $

VMPPIn $

(a)

(b)

(c) =
TPPn – TPPn-1

(d) =
(b / a)

(e)

(f) =
(b x e)

(g) =
(c x e)

(h) =
(d x e)

(i) =
(c x e)

1

10

10

10

7

70

70

70

70

2

30

20

15

7

210

140

105

140

3

43

13

14.3

7

301

91

100.1

91

4

55

12

13.75

7

385

84

96.25

84

5

74

19

14.8

7

518

133

103.6

133

6

80

6

13.3

7

560

42

93.1

42

7

80

0

11.42

7

560

0

79.94

0

Association Between ARP and MRP

There is a definite relation between ARP and MRP curves which is based on the Law of
Variable proportions. Both ARP and MRP curves are inverted U shaped or bell shaped.
First they rise upward, reach maximum and then decline, as it is represented in the
below diagram.

When the ARP curve rises, the MRP curve is above it.

When the ARP curve is at its maximum, a point M, the MRP curve cuts it
from above.

When the ARP curve falls, the MRP curve is below it and falls steep.

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